Resilient China
How strong is Chinaâ€™s economy?
Despite a recent slowdown, the worldâ€™s second-biggest economy is more resilient than its critics think
May 26th 2012 | from the print edition

CHINAâ€™S weight in the global economy means that it commands the worldâ€™s attention. When its industrial production, house building and electricity output slow sharply, as they did in the year to April, the news weighs on global stockmarkets and commodity prices. When its central bank eases monetary policy, as it did this month, it creates almost as big a stir as a decision by Americaâ€™s Federal Reserve. And when Chinaâ€™s prime minister, Wen Jiabao, stresses the need to maintain growth, as he did last weekend, his words carry more weight with the markets than similar homages to growth from Europeâ€™s leaders. No previous industrial revolution has been so widely watched.

But rapid development can look messy close up, as our special report this week explains; and there is much that is going wrong with Chinaâ€™s economy. It is surprisingly inefficient, and it is not as fair as it should be. But outsidersâ€™ principal concernâ€”that its growth will collapse if it suffers a serious blow, such as the collapse of the euroâ€”is not justified. For the moment, it is likely to prove more resilient than its detractors fear. Its difficulties, and they are considerable, will emerge later on.

Outsiders tend to regard China as a paragon of export-led efficiency. But that is not the whole story. Investment spending on machinery, buildings and infrastructure accounted for over half of Chinaâ€™s growth last year; net exports contributed none of it.( About time some die hard pundits here realize this) Too much of this investment is undertaken by state-owned enterprises (SOEs), which benefit from implicit subsidies, sheltered markets and politically encouraged loans. Examples of waste abound, from a ghost city on Chinaâ€™s northern steppe to decadent resorts on its southern shores.

Chinaâ€™s economic model is also unfair on its people. Regulated interest rates enable banks to rip off savers, by underpaying them for their deposits. Barriers to competition allow the SOEs to overcharge consumers for their products. Chinaâ€™s household-registration system denies equal access to public services for rural migrants, who work in the cities but are registered in the villages. Arbitrary land laws allow local governments to cheat farmers, by underpaying them for the agricultural plots they buy off them for development. And many of the proceeds end up in the pockets of officials.

This cronyism and profligacy leads critics to liken China to other fast-growing economies that subsequently suffered a spectacular downfall. One recent comparison is with the Asian tigers before their financial comeuppance in 1997-98. The tigersâ€™ high investment rates powered growth for a while, but they also fostered a financial fragility that was cruelly exposed when exports slowed, investment faltered and foreign capital fled. Critics point out that not only is China investing at a faster rate than the tigers ever did, but its banks and other lenders have also been on an astonishing lending binge, with credit jumping from 122% of GDP in 2008 to 171% in 2010, as the government engineered a bout of â€œstimulus lendingâ€.

Yet the very unfairness of Chinaâ€™s system gives it an unusual resilience. Unlike the tigers, China relies very little on foreign borrowing. Its growth is financed from resources extracted from its own population, not from fickle foreigners free to flee, as happened in South-East Asia (and is happening again in parts of the euro zone). Chinaâ€™s saving rate, at 51% of GDP, is even higher than its investment rate. And the repressive state-dominated financial system those savings are kept in is actually well placed to deal with repayment delays and defaults.

Most obviously, Chinaâ€™s banks are highly liquid. Their deposit-taking more than matches their loan-making, and they keep a fifth of their deposits in reserve at the central bank. That gives the banks some scope to roll over troublesome loans that may be repaid at a later date, or written off at a more convenient time. But there is also the backstop of the central government, which has formal debts amounting to only about 25% of GDP. Local-government debts might double that proportion, but China plainly has enough fiscal space to recapitalise any bank threatened with insolvency.

That space also gives the government room to stimulate growth again, should exports to Europe fall off a cliff. Chinaâ€™s government spent a lot on infrastructure when the credit crunch struck its customers in the West. But there is no shortage of other things it could finance. It could redouble its efforts to expand rural health care, for example. China still has only one family doctor for every 22,000 people. If ordinary Chinese knew that their health would be looked after in their old age, they would save less and spend more. Household consumption accounts for little more than a third of the economy.

Time is on my side

That underlines the longer-term problem China faces. The same quirks and unfairnesses that would help it withstand a shock in the next few years will, over time, work against the country. Chinaâ€™s phenomenal saving rate will start falling, as the population ages and workers become more expensive. Capital is also already becoming less captive. Fed up with the miserable returns on their deposits, savers are demanding alternatives. Some are also finding ways to take their money out of the country, contributing to unusual downward pressure on the currency. Chinaâ€™s bank deposits grew at their slowest rate on record in the year to April.

So China will have to learn how to use its capital more wisely. That will require it to lift barriers to private investment in lucrative markets still dominated by wasteful SOEs. It will also require a less cosseted banking system and a better social-security net, never mind the political and social reforms that will be needed in the coming decade.

Chinaâ€™s reformers have a big job ahead, but they also have some time. Pessimists compare it to Japan, which like China was a creditor nation when its bubble burst in 1991. But Japan did not blow up until its income per head was 120% of Americaâ€™s (at market exchange rates). If Chinaâ€™s income per head were to reach that level, its economy would be five times as big as Americaâ€™s. That is a long way off.

Certainly gives a more balanced view than the doom and glom "articles" that you read here every day.

Certainly gives a more balanced view than the doom and glom "articles" that you read here every day.

Click to expand...

Same to India economy, I think. Both are too "huge", which sometimes if you only look at pieces of good or bad news, especially with a limited economic model which perhaps fits western, smaller countries but definitely NOT them, you will draw all the conclusions you like to hear.

Still, among those raised "long-term problems", I believe the last one, "Chinaâ€™s bank deposits grew at their slowest rate on record in the year to April." is actually the one with most gravity. I mean: a real dilemma is for China decision makers now. They can't lower the interest rate to flame already rocketing inflation, nor to raise it at the face of slower economy. Perhaps the good sign is China leaders still have some cards/leverage - and as far as i know, the best part is they are aware they can NOT afford an even growing-slower economy: they are alert

Then again, I admit I could make my own fault - only watching pieces... ...

Yet the very unfairness of Chinaâ€™s system gives it an unusual resilience. Unlike the tigers, China relies very little on foreign borrowing. Its growth is financed from resources extracted from its own population, not from fickle foreigners free to flee, as happened in South-East Asia (and is happening again in parts of the euro zone). Chinaâ€™s saving rate, at 51% of GDP, is even higher than its investment rate. And the repressive state-dominated financial system those savings are kept in is actually well placed to deal with repayment delays and defaults.

Click to expand...

Who writes such crap? If savings is 51% of GDP and investment is 40% of GDP, then actual consumption is 10%? Or is all of the 40% financed by borrowing? At least bring some semblance of logic when writing down numbers!

Oh wait, all savings are put into real estate and markets as investment. So its basically the same thing.

Who writes such crap? If savings is 51% of GDP and investment is 40% of GDP, then actual consumption is 10%? Or is all of the 40% financed by borrowing? At least bring some semblance of logic when writing down numbers!

Oh wait, all savings are put into real estate and markets as investment. So its basically the same thing.

Click to expand...

It got nothing to do with disagreements.

I do however expect people at least read the articles carefully and have som basic knowledges.